A company's ability to be successful in today's competitive business environment depends, in large part, on its capacity to acquire and maintain technology and to competitively and consistently market/deliver that technology under well-known brand names. As a result, virtually all companies have active strategies to further develop and obtain technology either through in-house research and development or through acquisition from other parties. Where technology is unavailable through in-house development, companies have increasingly looked toward licensing to enhance their ability to obtain such competitive attributes. Licensing is a transaction under which one party, the licensee, receives contractual permission to use the technology of another party, the licensor, where the technology is the intellectual property (IP) of the licensor. Under the license, the licensor maintains title in the IP, and the licensee is authorized to make use of the IP only in accordance with the terms and conditions of the license.
A company's ability to be successful becomes particularly difficult when the company is a relatively smaller company with limited resources competing in an industry or market with large companies. In particular, many smaller companies, while efficiently supporting research, development, and design of products, lack the resources to competitively manufacture the end products that are the results of their development efforts when they are competing against large companies with vast resources. As such, these smaller companies are often forced into one of two predominant business models.
One business model into which smaller companies are often forced is a licensing-only model under which the small company licenses their technology to other companies who then manufacture and sell products that include the licensed technology. Under this model the licensee typically pays a royalty rate to the licensor that is a percentage of the sales price of the manufactured products. A problem with this licensing-only model is that it does not allow the smaller company, the licensor, to build any company/brand recognition and often returns unpredictable revenue streams over which the licensor has little or no control.
Another business model into which smaller companies are often forced is a third-party manufacturing model in which the small company contracts for the manufacturing services of third-party manufacturing companies. The manufacturing companies then manufacture products exclusively for the small company. While this third-party manufacturer model overcomes the company/brand recognition problem of the licensing-only model by allowing the small company to market products under their company/brand name, it introduces other problems because the small company's product delivery now depends on a third-party. Consequently, the small company has limited control over the manufacturing process, product quality, delivery schedule, and more particularly the cost of the manufactured products.
One particular third-party manufacturing model is an exchange model under which the small company provides a license to their technology to a third-party in exchange for the manufacturing services of the third-party. The manufactured products are marketed by both the small and large company. The typical third-party company of this model is a large company that designs, manufactures, and sells products in the same market as the small company. As one example, the large company may be an integrated device manufacturer (IDM) that produces its own silicon wafers while the small company is a fabless company that focuses on the design and development of semiconductor chips and outsources the production of silicon wafers to an IDM. This technology-manufacturing exchange model is effectively an exchange of IP for manufacturing services that forces the small company to compete in a market with the large company under their respective brands.
Under this technology-manufacturing exchange model the small company (the licensor) licenses the technology of the product to the large company (the licensee) using an IP license agreement under which a pre-specified quantity of products are manufactured. Distribution of the manufactured products is divided between the companies according to a pre-specified split, also referred to as a target division or target split. The large company absorbs the manufacturing costs and, in addition, makes a pre-determined royalty payment to the small company, for each retained product. The royalty payment is calculated using a pre-specified royalty rate that is typically a percentage of a sales price of the product. The small company, in turn, pays the manufacturing costs along with a mark-up payment for each product received from the large company. The mark-up payment is calculated using a pre-specified mark-up rate that is typically a percentage of a raw material cost of the products. Both the large and small companies then compete in the same market for sales of the product.
As with the other models described above, this technology-manufacturing exchange model presents numerous problems to the small company. A first problem is that the small company has a higher product cost than the large company because the mark-up rate is typically higher than the royalty-rate. This higher product cost makes it more difficult for the small company to compete against the large company for sales of the product, especially in high-volume markets. With a lower product cost, for example, the large company can force the small company out of the market simply by lowering sales prices of the products.
Another problem with this technology-manufacturing exchange model relates to the dynamic nature of material costs and product sales prices. For example, the dynamic nature of many product markets relative to material cost prevents the small company from locking in long-term guarantees from the large company as to material cost, thereby forcing the small company to execute shorter-term deals. Further, the dynamic nature of sales prices often results in unstable revenue streams for the small company in the absence of complicated sliding royalty scales and the like which are difficult and expensive to negotiate. The large company, in contrast, can cope with the effects of these dynamic variables more easily because of their relative position and size in the market.
At the center of these problems is the fact that the typical license has royalty rates and the mark-up rates tied to different factors. As described above, the royalty rate is typically a percentage of a sales price of the corresponding products while the mark-up rate is typically a percentage of a raw material cost of the corresponding products. As the large company can exert more control over the sales price and material cost, the large company can more effectively control the market relative to the small company. Thus, significant departures from the target division of products specified in the license can lead to a strong market advantage for the large company in the absence of specific penalties in the license, thereby allowing the large company to drive the small company out of the market as a supplier of products. What is needed is a way for IP developers and small companies that lack manufacturing capabilities to effectively compete for sales in a market with large companies having design and manufacturing facilities.
In the drawings, the same reference numbers identify identical or substantially similar elements or acts. To easily identify the discussion of any particular element or act, the most significant digit or digits in a reference number refer to the Figure number in which that element is first introduced (e.g., element 104 is first introduced and discussed with respect to FIG. 1).